Optimal Financing and Disclosure
47 Pages Posted: 23 Feb 2016 Last revised: 21 Jun 2016
Date Written: March 25, 2016
Abstract
How does a firm’s disclosure policy depend on its choice of financing? In this paper, I study a firm that finances a project with uncertain payoffs and jointly chooses its disclosure policy and the security issued. I show that it is optimal to truthfully reveal whether the project’s payoffs are above a threshold. This class of threshold policies is optimal for any prior belief, for any security, and any increasing utility function of the entrepreneur. I characterize how the optimal disclosure threshold depends on the underlying security, the prior, and the cost of investment. The optimal security design is indeterminate despite the presence of adverse selection. Among others, the optimum can be implemented with equity, debt, and options.
Keywords: Disclosure, Financing Choice, Investment, Bayesian Persuasion
JEL Classification: G32, D82, D83
Suggested Citation: Suggested Citation